COLUMN-Fracking complicates the climate debate: John Kemp

Wed Jan 25, 2012 7:58am EST

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(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON Jan 25 (Reuters) - Hydraulic fracturing and horizontal drilling have laid to rest concerns about peaking oil and gas supplies for a generation, but they have also made the search for comprehensive policies to restrain greenhouse gas emissions more urgent.

In a world where fossil energy remains abundant and relatively cheap the economy will combust increasing quantities. Oil and gas reserves will last long after the planet has been gently cooked unless governments enact deliberate policies to restrain consumption.

Fracking has solved one problem (peak fuel) but sharpened another (climate change). Policymakers and voters can no longer rely on increasing scarcity, and rising oil and gas prices, to restrain demand and carbon emissions through the market.

POLITICAL INACTION

Public support for policies to tackle global warming by curbing use of fossil fuels is broad but not deep. For a minority of environmentally minded voters and policymakers climate change is the over-riding priority. But for most voters and politicians climate is only one of number of competing priorities that include quotidian concerns about growth, jobs, income and quality of life.

In surveys, most voters express general support for policies aimed at limiting emissions through curbing the use of fossil fuels. However that support quickly evaporates when restrictions entail substantial changes in behaviour or quality of life such as large increases in the cost of international air travel, motor fuels and home heating.

Most voters want to avoid climate change. But they also want to continue taking holidays and visiting relatives on other continents, commuting from the suburbs and countryside to work, and having access to a wide range of energy-intensive products at affordable prices.

So far, the political process has struggled to enforce voluntary curbs on oil and gas consumption. The shaky curbs agreed under the Kyoto process have fallen victim to the recession as household priorities in the advanced economies shifted from climate to jobs and incomes.

Isolated policies to curb emissions continue to move forward in jurisdictions such as the EU, Australia and California. Policymakers have, however, pushed back proposals for more comprehensive global measures until at least 2020, in effect admitting the problem is too hard for now.

PEAK OIL GOES AWAY

The relationship between energy prices and climate change is complex. In some instances, rising prices for gasoline, gas and electricity have sapped voters' enthusiasm for ambitious decarbonisation targets that would push their fuel bills up even further.

Under pressure from voters anxious about soaring utility bills, Britain's enthusiastic climate minister Chris Huhne has been busy rebranding clean energy as affordable energy, a point echoed by U.S. President Barack Obama in his State of the Union address on Tuesday.

Obama did not mention either carbon or emissions at all, and climate only once. But the word clean or cleaner got eleven mentions, and the president made sure that the first was twinned with cheaper, promising "a strategy that's cleaner, cheaper and full of new jobs".

The same rebranding is widespread. In an information paper on "Policy considerations for deploying renewables", published on November 23, the International Energy Agency (IEA) put protecting climate and other environmental issues third after energy security and encouraging development in its list of reasons why governments and consumers should take measures to increase the share of energy from renewable sources .

In general, however, fears about future scarcity and rising oil and gas prices have been an important spur to emissions control. Concerns about peaking oil and gas enabled policymakers to promote emissions control as a cost-saving measure in the short and medium term, as well as having long-term benefits in terms of global warming.

The biggest reductions in fossil fuel use (the switch to nuclear energy in France and Japan in the 1970s and 1980s, the ethanol blending mandate in the United States in 2005 and 2007) have all been spurred by spiking oil and gas prices.

Price rises ensured that the private and national interest in cutting usage of expensive fuels coincided with the public and international interest in curbing emissions, overcoming the obstacles to policy action.

The IEA, which is supposed to be watchdog for energy consuming countries, often seemed to welcome the surge in oil and gas prices in 2003-2008 because it sharpened the incentives for conservation and emissions control. As the IEA recognised, fear of even worse rises in future was the most effective stimulus to action.

Fracking now threatens to change all that. Just as hydraulic fracturing is transforming the outlook for oil and gas supplies in coming decades, it is also revolutionising the context for emissions control policies and climate change.

In the mid-2000s, policymakers could draw on the prospect of shrinking oil reserves, medium term shortages, and rising prices to make the case for aggressive action to promote efficiency, clean energy and behavioural changes to cut energy consumption.

Now policymakers must make the same case in a world where supplies have been substantially enhanced and prices could be flat or even falling in the medium term.

PLENTIFUL, CHEAP FUELS

The best way to appreciate the magnitude of the problem is to examine how market expectations for medium-term oil and gas prices have shifted in the last four years.

In July 2008, five-year forward oil futures contracts implied that the market expected prices to be around $140 per barrel in 2013.

Obviously that expectation looks unlikely, barring geopolitical upheaval. In the short term it has been mostly invalidated by the recession. But profound shifts in both consumption (from ethanol blending and efficiency) and supply (fracking and deepwater drilling) have done more to change the medium-term outlook.

Mostly as a result of the fracking revolution, the market now expects oil prices to be as low as $90 in 2017 based on five-year forward prices.

The shift in expectations for North American natural gas has been even more dramatic. Five-year forward gas prices have more than halved from $10.50 per million British thermal units (mmBtu) in 2008 to just under $5.

There is no guarantee the market's current five-year forecasts will prove any more accurate than those in 2008. However, neither markets, nor policymakers, now expect serious shortages of oil and gas in the next decade.

The IEA has written about "a golden age of gas". A similar revision of its medium-term outlook for oil is probably not far behind. Policymakers can no longer rely on a forecast of ever-rising fossil fuel prices.

By taking away the spectre of peak oil and gas, fracking has cruelly undercut one of the most important (complementary) arguments for curbing carbon emissions.

Policymakers can no longer hide behind the market to tackle emissions. In future, they will have to make the case for curbs directly, based on climate effects. Past experience suggests it is difficult to catalyse sustained and aggressive reductions in emissions based on climate effects alone but fracking means politicians and environmental campaigners have no other choice.

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